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After strong growth for years, admissions at Indiana University Health hospitals in the first half of the year suddenly dipped 4.3 percent.

So IU Health executives, who were already looking for ways to cut $1 billion in expenses, decided to give pink slips to 800 employees, according to an announcement Thursday morning.

Meanwhile, however, IU Health's business is stronger than ever, with income from operations shooting up nearly 20 percent in the first half.

“With more than 50 percent of our costs related to labor, and in the face of declining reimbursements and fewer people being admitted to the hospital, we have regrettably concluded that a work force reduction is necessary,” said Jim Terwilliger, CEO of IU Health’s flagship hospital, Methodist. “This is not a decision that we have reached easily or taken lightly, and comes after great consideration.”

IU Health currently had 36,000 employees, although many of those work part-time schedules. It’s full-time equivalent workforce totals 27,000. For all of 2012, IU Health had revenue of $5.6 billion.

IU Health’s decision comes less than three months after Indianapolis-based St. Vincent Health laid off 865 workers in late June, which was part of a 5,000-worker layoff by its parent organization, St. Louis-based Ascension Health Alliance.

Hospitals around the country have been doing the same, as they worry that fewer patients and lower payments will no longer support the expensive operations they built up during a long boom.

“I believe that, as an industry, we have been inefficient,” IU Health CEO Dan Evans said during an April interview in which he announced the $1 billion cost-cutting goal.

IU Health has been able to offset its decline in hospital admissions with an 8-percent price increase and by receiving more patient visits to its outpatient facilities.

Excluding one-time items, IU Health income from operations rose 19 percent in the first half of 2013 compared to the same period in 2012. IU Health pulled in $186.3 million during those six months, compared with $156.6 million the year before.

Inpatient admissions—those that involve an overnight stay—had been climbing consistently throughout 2012. But then, in January, they started to fall.

Total inpatient admissions in the first six months totaled 68,952, down from 72,057 during the same period last year, according to data IU Health released to bond investors last month.

The steepest declines came at IU Health’s downtown hospitals—Methodist, University and Riley Hospital for Children—where inpatient visits fell 6.3 percent.

Even though IU Health saw fewer patients staying overnight in its hospitals, the total days those patients stayed did not fall until the second quarter. And IU Health posted a slight increase in total patient days for the first six months this year.

IU Health outpatient visits—anything that does not require an overnight stay—rose 1.9 percent during the first six months of 2013. At IU Health’s suburban Indianapolis hospitals in Avon, Carmel, Fishers and Tipton, outpatient visits soared 13.4 percent during the first half.

“We think that the future is going to be around population health. How do you keep people healthy?” Terwilliger said. And that means keeping more patients out of the hospital.

Indeed, the federal Medicare program and private insurers are pushing hospitals like IU Health to enter new kinds of contracts in which they can earn bonuses for keeping patients out of the hospital but could suffer penalties if they spend too much to take care of patients.

That’s one factor pushing down hospitalizations nationwide. In addition, persistently high unemployment and the increasing prevalence of high-deductible health insurance plans have left more patients exposed to the high cost of a hospital visit.

What really has IU Health scared, however, is that the federal Medicare program has been reducing payments to hospitals—and private insurers are likely to follow suit. Whereas hospitals for years have claimed that Medicare payments ran about 20 percent below their costs, hospitals now are desperately trying to cut costs to make money on Medicare.

In addition to cutting jobs, IU Health also has been trying to reduce expenses by closing and consolidating programs. For example, it closed pediatric and cardiac rehabilitation programs at Methodist hospital, and now sends patients to similar programs at Riley and at its suburban hospitals.

“We continue to root out expenses that do not add value to our patients,” Terwilliger said.

The job cuts will be focused on IU Health's three downtown hospitals as well as its hospitals in Carmel, Fishers, Muncie and Tipton. The 800 cuts will occur in all areas of those hospitals' operations, including clinical and administrative staff.

The cuts will come from layoffs and possibly from some early retirement buyouts—something IU Health has never done before. Laid-off workers will be notified by Oct. 1 and will have their last day with IU Health near Dec. 1.

IU Health officials said they would provide outplacement services, spiritual support and severance. They declined to detail the severance packages.

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all’s career as a journalist was set in fifth grade, when he took on an afternoon paper route for The Indianapolis News. He admits to being a terrible paperboy because instead of delivering the newspaper right away, he would sit and read it for hours. He may have lost some customers, but he never lost the bug for news. A lifelong resident of central Indiana, Wall grew up in Sheridan—the one spot in Hamilton County untouched by suburbia. After graduating from DePauw University in Greencastle, he joined The Indianapolis Star as a business reporting intern and refused to leave until he had a full-time job. Wall stayed there five years before joining IBJ in February 2007. Wall and his wife now live in Indianapolis with their two sons. When not at the office, the Walls spend time with their extended family and worship at Christ Church Reformed Presbyterian in Brownsburg

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